Journal of International Economics and Management

Journal homepage: http://jiem.ftu.edu.vn

Interdependence of stock markets: evidence from Vietnam

Tran Thi Van Anh
University of Economics and Business, Vietnam National University, Hanoi, Vietnam
Dao Hoang Tuan
Academy of Policy and Development, Hanoi, Vietnam
Nguyen Thi Nhung
University of Economics and Business, Vietnam National University, Hanoi, Vietnam
Received: 14 September 2022; Revised: 15 November 2022; Accepted: 30 November 2022
https://doi.org/10.38203/jiem.022.3.0056
Abstract
The study investigates the effect of spillovers regionally and worldwide on Vietnam’s
stock market. The vector error correction model (VECM) is used to analyze the
collected data from Bloomberg. Data include eight comparable stock market indices,
namely DJI, NKY, SHCOMP, SET, MXSG, PCOMP, FBMKLCI, and JCI. The
empirical results show that the Vietnamese stock market is significantly linked to that
of the other countries. During the periods of dramatic market fluctuation, the cross-
border linkage between the VN-Index and comparable indices is the largest. The impact
of the stock markets of small nearby countries such as Singapore and Malaysia on the
Vietnamese stock market are greater than the other large ones including the United
States, Japan and China. The findings of this study contribute to the literature on the
interdependence and interaction of stock markets. The common economic integration,
especially in showing that effect found in other studies, is meaningful in explaining the
observed phenomenon.
Keywords: Interdependence, Spillover effect, Price co-movement, Cross-border
relationship ASEAN exchanges, Stock market indices
1. Introduction
It can be clearly seen that for more than 20 years, the Vietnam stock market has
developed significantly and it has played an important role in the development of
national economy in Vietnam. According to the State Securities Commission, the first
session of the Vietnamese stock market in 2000 only involved two listed companies.
By 2006, the number of companies listed on the stock exchange was about 200 and
more than 1,600 by the end of 2019.
 As of June 30, 2020, the total capitalization of Vietnam stock market reached 5.5
million billion VND, the market capitalization to GDP ratio increased from 0.3% in
2000 to 104% GDP in June 2020. The stock market capitalization reached over 4
million billion VND, equivalent to about 64.5% GDP in 2019. The stock market
capitalization is estimated to have grown at an average rate of more than 50% per year
over the past 20 years (Ta, 2020). Moreover, the number of investor accounts increased
from 3,000 accounts in 2000 to 2.5 million accounts as of 30 June 2020. In which, there
are about 33,000 accounts of foreign organizations and individuals with a total value
of securities holding equivalent to nearly 35 billion USD. Foreign investors' portfolio
value accounts for about 20% of Vietnam stock market capitalization (Ta, 2020).
As economic integration through the participation in new-generation free trade
agreements (FTAs) is a popular trend in the recent years, the role of the stock market
becomes even more important. The new-generation FTAs such as the Comprehensive
and Progressive Agreement for Trans-Pacific Partnership (CPTPP), FTA Vietnam -
European Union (EVFTA) or the ASEAN Economic Community agreement (AEC)
have been promoting the financial integration of Vietnam in general and the Vietnam
stock market integration. In fact, stock market integration has attracted a lot of
investors, academic researchers, and policy makers because it can generate a more
competitive market and foster international portfolio diversification and risk sharing
(Ahmed and Rui, 2018). However, there are not many quantitative studies that provide
specific evidence on the interdependence of the Vietnam stock market and other ones.
To our best knowledge, there was only one research of Nguyen (2011) that focuses
on the spillover effect of the United States macroeconomic news on the Vietnamese
stock market returns. This sold study did not take in to account the indices of these
markets. Our research aims to investigate the interdependence between the Vietnamese
stock market and other stock markets such as the the US, Japan, China. Several other
neighboring countries’ stock markets, including Thailand, Singapore, Philippines,
Malaysia and Indonesia, are also taken into account. These stock markets are chosen
since the US and Japan are considered the benchmark markets for many other
countries. The US, Japan and China are also the three most important trade partners of
Vietnam (World Bank, 2021) and one would expect the economic integration effect on
stock price co-movement. Moreover, due to the assumption that there is a stricter price
co-movement among stock markets of countries which are close to each other than
those further apart (Zhang et al., 2016; Chong et al., 2011; Eckel et al., 2011; Chuang
et al., 2007), the stock markets of ASEAN countries are examined in this study.
Furthermore, since it is convenient to compare interdependence between two markets
in a stable period with periods of shock and post-shock (Yang et al., 2003; Yiu et al.,
2010), the research period is divided into different sub-periods. It serves the purpose of
evaluating the correlation between the VN-Index and the stock market index of other
countries in terms of uptrends, downtrends and sideways trends. The vector error
correction model (VECM) is employed to analyse the data.
Our article has made three major contributions. Firstly, the study added evidence
to the literature on the interdependence of stock markets, which is a matter of discussion
in the context of growing economic and financial integration across countries.
Secondly, the findings provide evidence on the interaction between the Vietnamese
stock market and that of some leading trade-partners and neighboring ASEAN
countries. This study hopes to provide some quantitative evidence on these
correlations. The results can be a useful reference for investors when building an
investment strategy, as well as for policymakers when devising strategies to adjust the
functioning and operation of the Vietnamese stock market. Third, it is shown that the
economic integration effect does not explain co-movement between the Vietnamese
stock market and other markets.
The US, China and Japan are the three most important trade partners of Vietnam,
accounting for 46.59% of Vietnam’s trade volume in 2019 (World Bank, 2021).
However, the linkage between the Vietnamese market and these large markets is
weaker than that of Vietnam and other minor trade partners in the ASEAN. A possible
explanation is about the economic structure of Vietnam., where trade is dominated by
foreign trade investment (FDI) companies. These enterprises are rarely listed in the
Vietnamese stock market.
This paper consists of six parts. Following the introduction, the literature review
and the methodology are presented in the second and third parts, continued by research
results in the fourth part and discussion in the fifth part. Some conclusions are found in
the last section.
2. Literature review
There exists different interpretations of the stocks market interdependence (Forbes and
Rigobon, 2002; Corsettia et al., 2005; Jung and Maderitsch, 2014).
Forbes and Rigobon (2002) define the the stocks market interdependence as a
structural stability of the correlation coefficient in all states of the world. It means
that if there is no significant increase in the price co-movement between two stock indices
following a shock, it suggests that there is a strong and stable interdependence between
the two stock markets. This approach is considered relatively simple, which is fitted to
be used as a measure in comparing interdependence between two markets during a stable
period (Champagne et al., 2017).
There has been an increase in international stock market interdependence over the
past three decades (Baele and Inghelbrecht, 2010; Aityan et al., 2010). This
interdependence relationship is subject to change over time (Tam, 2014) and this often
occurs during period of market volatility (Jinjarak and Zheng, 2014; Aityan et al.,
2010). The stock markets within a short geographic distance tend to display greater
price co-movement than those further apart (Chong et al., 2011; Eckel et al., 2011).
 Pretorius (2001) attempts to provide a theory explaining stock market
interdependence. According to Pretorius (2001), the interdependence of stock markets
primarily originates from three main sources. The first is the “contagious effect”, which
is the capability of spreading a country’ economic crisis to other countries or a
significant increase in cross-border relationships after a shock to one or a group of
countries (Forbes and Rigobon, 2002). The second reason is the “characteristics” of the
stock market, namely industrial similarity, market volatility and market size. The third
is the “economic integration” between two countries. This means that deeper
integration of two countries' economies makes their stock markets more
interdependent. This interdependence becomes greater as countries intensify economic
integration (Abbas et al., 2013; Walti, 2011; Tavares, 2009) and liberalization of their
capital markets (Bekaert and Harvey, 1997).
As economic growth is closely related to development of the stock market,
especially in the case of emerging countries (Mian et al., 2010; Touny, 2012;
Mohammad et al., 2018) so that the stock markets can be classified in accordance with
the division of countries suggested by Wallerstein's World Systems Theory
(Wallerstein, 2004). This theory divides countries in the world into three groups namely
core, semi-periphery and periphery based on the economic growth of these countries
so if using this theory, the stock markets around the world can also be divided into
similar groups. Specifically, the core can be defined as those countries with fully
developed stock markets which are likely to impact the stock markets of other
countries. The peripheral countries have weaker equity markets with little or no
influence on the stock markets of other countries. The semi-periphery has a stock
market with growth and influence lying at the level between the two above groups.
Similar to the classification of countries, the stock markets can also change from the
periphery to the semi-periphery and to the core group and vice versa. Regarding to
studies on the interdependence of stock markets, we can also categorize such studies
using this classification.
There are many studies on the interdependence between stock markets of core
countries. Assessing the interdependence between the European and US stock markets,
Sanvi and Neto (2004) noted a strong linkage between market volatility and the stock
returns correlation. Kim (2003) found that the impact of the US stock market on the
Australian stock market gradually decreased after the Asian crisis while the Japanese
stock market maintained a modest effect on the other two markets. Analyzing the
interdependence between nine major stock markets Bessler and Yang (2003) showed
that the Japanese stock market was the most exogenous market, and the Canadian and
French stock markets were the least exogenous. However, the US stock market was the
only market that had a large influence on price co-movements for the other stock
markets in the long term.
 In terms of studies on the interdependence between the stock markets of the core
countries and the semi-periphery countries, Zhang et al. (2016) investigated the
interdependence of twenty-seven markets in Asia, America, and Europe to find that
stock markets from different continents not only have a strong linkage with each other
on the same day, but also at a delay of one day. In addition, the authors pointed out that
this relationship often fluctuated very unpredictably during periods of financial
downturn. Yang et al. (2003) and Yiu et al. (2010) also emphasized that spillover
effects1 were reinforced during periods of crisis.
There are also several studies on the interdependence between stock markets of the
semi-periphery countries, such as Chuang et al. (2007), who found that the
interdependence of six East Asian equity markets was high. The authors also showed
that while the Japanese stock market was the most exogenous and least sensitive to
fluctuations from others, it had the greatest impact on the transmission of volatility to
other stock markets under consideration. Liu (2013) explored the interdependence
between forty stock markets from 1996 to 2010 based on analyzing four types of
market linkages including information capacity, financial integration, economic
integration, and similarity in industrial structure. The author noted a clear difference
between the interdependence of developed markets and that of developing markets.
The fact that Asia is considered a vibrant economic development area in the last
three decades has also made these countries' stock markets thrive as well. Many Asian
countries have reformed their domestic financial markets in the direction of opening up
their economy and integrating with the world market. This makes the stock markets of
these countries more linked with each other and more associated with the stock markets
of other countries in the world. Because indicates that stock market interdependence in
the emerging markets (or semi-periphery) countries in Asia seems to be a widely
accepted fact (Pretorius, 2001), there is a growing body of researches examining the
Asian stock market interdependence, such as Xiao et al. (2017), Ginanjar et al. (2016),
Chuang et al. (2007) and Samarakoon (2011).
There are only a few studies on stock market interdependence in emerging Latin
American countries, whích are also considered as semi-periphery countries, however,
they indicate that stock markets in those countries are also interdependent (Christofi
and Pericli, 1999), Choudhry (1997).
Few studies have focused on the interdependence of African stock markets with
the rest of the world. Ahmed and Rui (2018) analyze the dynamic linkages between
Chinese and African stock markets in recent years to find a strong evidence of spillover
effects in price co-movement implying that Chinese and African stock markets are

1Spillover effects are the impacts that seemingly unrelated events in one country could
have on the economies of other countries. Diebold and Yilmaz introduce a volatility
spillover measure based on forecast variance decompositions from vector autoregression
(Diebold and Yilmaz, 2009; Diebold and Yilmaz, 2012).
showing signs of interdependence. Collins and Abrahamson (2004) indicate that the
oldest and largest stock markets in the African continent such as those in South Africa,
Egyp,t and Morocco are most integrated globally.
Narayan and Rehman (2017) found a stable long-term interdependence between
the stock markets of Asian semi-periphery and periphery countries and the US and
Japanese stock markets for the period 2000-2013 (Narayan and Rehman, 2017) as well
as for two stages 2000-2013 and 2000-2018 (Narayan and Rehman, 2020). They also
found similar results when comparing the stock markets of semi-periphery countries
with those of peripheral countries in Asia (Narayan and Rehman, 2018),
Regarding periphery countries, the interdependence between the stock markets of
those countries and the stock markets of other countries in the world is not strong. For
example, Elyas et al. (1998) did not find the significant interdependence between the
capital market of Sri Lanka and the markets of its major trading partners.
In terms of methodology, researchers use different methodologies and models to
analyze the stock market interdependence which summarized in Appendix A.
2. Research methodology
2.1 Research design and data collection
The study aims to investigate whether there is an interdependence between the stock
market in Vietnam and eight other stock markets, including the United States, Japan,
China, Thailand, Singapore, Philippines, Malaysia and Indonesia. To be precise, the
research is expected to determine which stock market is mostly correlated with the
Vietnamese stock market and in which context (among uptrends, downtrends and
sideways trends) the stock market in Vietnam is mostly affected by international stock
markets. There are three hypotheses to be verified, including:
H1: The Vietnamese stock market comoves with eight other stock markets,
including the United States, Japan, China, Thailand, Singapore, Philippines,
Malaysia and Indonesia.
H2: There are differences in linkages between the Vietnamese stock market and
eight other stock markets, including the United States, Japan, China, Thailand,
Singapore, Philippines, Malaysia and Indonesia in different stock market trends
(including uptrends, downtrends and sideways trends).
H3: The Vietnamese stock market has greater co-movement with neighboring
stock markets than those of the United States, Japan and China.
Data consist of daily closing stock market indices from Vietnam (VN-Index), the
United States (DJI Index), Japan (NKY Index), China (SHCOMP Index), Thailand
(SET Index), Singapore (MXSG Index), Philippines (PCOMP Index), Malaysia
(FBMKLCI Index) and Indonesia (JCI Index), which are sourced from Bloomberg
from November 2012 to March 2021. Based on the technical analysis, this research
period is divided into five distinct sub-periods mentionned in the Figure 1. The first
sub-period from from November 2012 to August 2014, the third sub-period from
March 2016 to April 2018 and the last sub-period from April 2020 to March 2021
experienced an upward trend in the VN-Index while this index stayed stable during the
second sub-period from September 2014 to February 2016 and a slight decrease from
May 2018 to March 2021.
Figure 1. Movement of the VN-Index from November 2012 to March 2021

Source: Bloomberg
2.2 Methods of data analysis
The correlation between market return in Vietnam and market returns of eight distinct
stock markets (including the United States, Japan, China, Thailand, Singapore,
Philippines, Malaysia and Indonesia) is determined by the vector error correction
model (VECM) since this research method allows evaluation of the relationship betwen
stock market in both short and long run. This means that the VECM can give results
about the number of cointegrations between two variables and number of lags between
them. This means how long the dependent variables can influence independent
varables, which can clearly answer the research questions. The VECM includes four
main steps, starting with the stationarity of market return data by the Augmented
Dickey-Fuller test. Stock market returns are calculated by the following equation:
𝑃𝑡 − 𝑃𝑡−1
𝑅𝑡 =
𝑃𝑡−1
Where Rt denotes market return at time t ; Pt represents stock index at time t;
Pt - 1 denotes stock index at time t - 1.
A basic regression models between ∆𝑅𝑡 and 𝑅𝑡−1 results to a β as a coefficient.
If β is equal to 0, the time series is non-stationary (H0 ). This hypothesis is rejected if
t-Statistic is bigger than τ on Kendall’s tau table. Moreover, the higher R-squared in
the regression between 𝑅𝑡 and 𝑅𝑡−1 , the better the intercept c and @trend and slope
coefficients are.
Consequently, the process of data analysis continues with determination of
optimal lag length by some criteria, such as Akaike information criterion (AIC),
Schwarz information criterion (SC), FPE criterion (final prediction error) and Hannan
Quinn information criterion (HQ), which is followed by Johansen cointegration test.
The market return in Vietnam have a cointegration with the market return in the
compared country when the Trace and Max Eigenvalue statistic value of smaller than
5% critical value.
If there is no cointegration, the research tests a Granger causality to consider the
short-term causal relationship between the market return in Vietnam and the market
return in the compared country. By contrast, in case of a cointegration, the final step of
VECM is executed to verify both short and long-run between variables by an estimated
VECM as below:
∆𝑅j,t = 𝛽0 + ∑𝑛𝑖=1 𝛽𝑖 ∆𝑅𝑗,𝑡−1 + ∑𝑛𝑖=1 𝛿𝑖 ∆𝑅𝑖,𝑡−1 + 𝜔𝜇𝑡−1 + 𝑣𝑡 (1)
where 𝑅𝑖,𝑡 denotes market return in compared country at time 𝑡, 𝑅𝑗,𝑡 is market return
in Vietnam at time 𝑡, ∆ is the difference in
return, 𝜇𝑡−1 denotes the lagged value of the error correction term, 𝑣𝑡 is a white
noise error term.
The long-run relationship between the market return in Vietnam and the compared
market return is explained through the cointegrate equation (long-run model):
μt−1 = 𝐸𝑇𝐶𝑡−1 = 𝑅𝑗,𝑡−1 − 𝛽0 − 𝛽1 𝑅𝑖,𝑡−1 . (2)
Variables experience a long-run relationship when the coefficient of the cointegrate
equation which indicates how quickly the dependent variable (R j,t ) returns to
equilibrium after a change in the independent variable (R j,t ), is between -1 and 0
statistical significance.
3. Empirical results
3.1 Data description
In terms of returns on stock market indices, table 1 indicates that in the first three sub-
periods, the NKY Index experienced the biggest maximum values as well as the
smallest minimum values, when compared to the VN-Index and other indices, which
lead to the highest standard deviation of the NKY. However, there was a shift in
positions between the DJI Index and the NKY Index, in terms of maximum and
minimum values as well as standard deviation since the fourth sub-period in May 2018.
In fact, there were no regulations about price fluctuation limits in the American and
Japanese stock markets while the VN-Index and other indices like the SHCOMP Index
went up and down around the price range of +-7% of the reference price. As regards to
ASEAN countries, the FBMKLCI Index in Malaysia always had the smallest standard
deviation while the highest one belonged to the PCOMP Index in the Philippines.
Moreover, indices in most countries had the biggest standard deviation in sub-period
4, when the stock market went down compared to its upward and stable periods.
Table 1. Descriptive statistics about returns on stock market index of Vietnam and
comparing countries
 VN- DJI NKY SHCOMP SET MXSG PCOMP FBMKLCI JCI
Return
Index Index Index Index Index Index Index Index Index
Sub-Period 1: November 2012 to August 2014
Max 3.47 2.35 4.94 4.32 4.42 2.37 5.70 3.38 4.65
Min -5.87 -2.36 -7.32 -5.30 -5.23 -2.65 -6.75 -2.43 -5.58
Mean 0.14 0.06 0.03 0.00 0.06 0.03 0.05 0.01 0.04
Standard deviation 1.04 0.64 1.45 1.03 1.07 0.59 1.15 0.48 1.10
Sub-Period 2: September 2014 to February 2016
Max 3.85 3.95 7.71 5.76 2.87 2.88 3.64 2.25 4.55
Min -5.28 -3.57 -5.40 -8.49 -4.73 -4.22 -6.70 -2.70 -3.97
Mean 0.00 0.00 0.02 0.16 0.00 0.00 0.00 0.00 0.05
Standard deviation 1.05 0.96 1.47 2.24 0.84 0.88 0.97 0.69 0.99
Sub-Period 3: March 2016 to April 2018
Max 3.77 2.84 6.72 4.26 4.59 2.76 3.09 1.34 2.79
Min -5.10 -4.60 -7.92 -4.05 -3.15 -2.36 -2.88 -2.19 -4.01
Mean 0.15 0.05 0.01 0.06 0.03 0.01 0.00 0.00 0.01
Standard deviation 0.88 0.70 1.13 0.80 0.63 0.72 0.89 0.43 0.70
Sub-Period 4: May 2018 to March 2020
Max 4.71 11.37 8.04 5.60 7.95 6.72 7.44 6.85 10.19
Min -6.28 -12.93 -6.08 -7.72 -10.80 -7.14 -13.34 -5.26 -6.58
Mean 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Standard deviation 1.12 1.58 1.22 1.25 1.20 1.08 1.43 0.80 1.17
Sub-Period 5: April 2020 to March 2021
Max 4.98 7.73 4.88 5.71 6.68 4.15 5.23 3.33 4.07
Min -6.67 -6.90 -4.50 -4.50 -5.44 -3.38 -7.07 -3.05 -5.01
Mean 0.22 0.13 0.00 0.00 0.00 0.00 0.00 0.00 0.03
Standard deviation 1.38 1.37 1.23 1.09 1.21 1.09 1.48 0.93 1.21
Source: Authors’ calculation
3.2 The results of estimating Vector error correction model (VECM)
Firstly, a regression with intercep c and @trend shows that the absolute value of t-
statistics is bigger than the absolute value of criteria value 𝜏 on the Mackinnon table
(Table 2). This means that all the series of index returns in Vietnam, the United States,
Japan, China, Thailand, Singapore, Philippines, Malaysia and Indonesia had no trend
and intercept during all five research sub-periods from November 2012 to 19 March
2021.
Table 2. Augmented Dickey-Fuller test statistic
Augmented Dickey-Fuller test statistic t-Statistic Prob.*
VNIndex -21.361 0.000
DJI Index -22.953 0.000
NKY Index -23.611 0.000
SHIMCOMP Index -20.953 0.000
SET Index -21.100 0.000
MXSG Index -20.674 0.000
PCOMP Index -19.917
 Augmented Dickey-Fuller test statistic t-Statistic Prob.*
FBMKLCI Index -19.425
JCI Index -19.541
Test 1% level -3.443
critical 5% level -2.867
values: 10% level -2.569
Source: Authors’ calculation
Secondly, by showing the value of AIC, SC, HQ with the lowest statistic values,
the second step indicates optimal lags between returns on the VN-Index and those on
indices in the United States, Japan, China and five neighboring countries in the table 3.
Overall, index pairs reach the highest optimal lags in the fourth period during the fourth
sub-period when VN-Index decreased. Moreover, most of the return pairs between the
VN-Index and compared indices have an optimal lag of 1 during the sideways period
(in sub-period 2), apart from pairs of the VN-Index & the SHCOMP Index and the VN-
Index and the PCOMP Index. Furthermore, there are differences in optimal lags when
stock markets increase in the first, third and fifth sub-periods.
Table 3. Optimal lags between VN-Index Returns and Returns of compared indices
Sub-period 1Sub-period 2Sub-period 3Sub-period 4Sub-period 5
VN-Index & DJI Index 1 1 4 8 1
VN-Index & NKY Index 3 1 - 7 2
VN-Index & SHCOMP Index - - - 3 -
VN-Index & SET Index - 1 - 6 -
VN-Index & MXSG Index 5 1 - 5 -
VN-Index & PCOMP Index 4 - - 5 -
VN-Index & FBMKLCI Index 3 1 - 3 -
VN-Index & JCI Index 3 1 3 3 2
Source: Authors’ calculation
Thirdly, the Johansen cointegration test results to the Eigenvalue statistic value is
smaller than 5% critical value, leading a cointegration (long-term relationship) at the
5% significance level between returns on the VN-Index and returns on compared
indices over the research period from November 2012 to March 2021(Table 4).
Table 4. Results of co-integration test
Eigenvalue 0.05 Critical Value
VNIndex & DJI Index 0.344
VNIndex & NKY Index 0.240
VNIndex & SHCOMP Index 0.499
15.494
VNIndex & SET Index 0.503
VNIndex & MXSG Index 0.157
VNIndex & PCOMP Index 0.234
 VNIndex & FBMKLCI Index 0.221
VNIndex & JCI Index 0.263
Source: Authors’ calculation
In addition, values of the the coefficient of ETC among eight index pairs which
are presented in the table 5 confirm a total long-run relationship between returns on the
VN-Index and returns on compared indices. In other words, hypothesis H1 is accepted.
Finally, the long-run relationship between returns on the VN-Index and returns on
compared indices become stronger in case of an increase or reduction in indices while
correlations between returns on the VN-Index and returns on compared indices have
the smallest values in the case of sideways trends, meaning that the hypothesis H2 is
accepted. To be precise, in the significantly upward period from March 2016 to April
2018, all three coefficients of the cointegrating equation reached the highest level,
followed by a slight decrease period from May 2018 to March 2020 while the lowest
values appear in the sideways period (or the second sub-period). Furthermore,
concerning the speed at which the dependent variable (i.e. returns on the VN-Index)
reaches equilibrium after a change in an independent variable (i.e. returns on compared
indices), returns on VN-Index and these compared indices experience the highest level
in the third sub-period when the market dramatically falls, followed by the fourth sub-
period when there is a decrease in stock market indices.
Table 5. Coefficients of ETC
Pairs Sub-period 1 Sub-period 2 Sub-period 3 Sub-period 4 Sub-period 5
VN-Index & DJI Index (0.12132) (0.20718) (0.05245) (0.78140) (0.51759)
VN-Index & NKY Index 0.000721 (0.05049) (0.47744) (0.15900) (0.12407)
VN-Index & SHCOMP Index (0.71056) (0.30179) (0.99896) 0.052024 (0.71108)
VN-Index & SET Index (0.61229) (0.18354) (1.02629) (0.31311) (0.38979)
VN-Index & MXSG Index (0.94936) (0.12841) (0.99670) (0.85066) (0.55286)
VN-Index & PCOMP Index (0.02504) (0.16391) (0.97892) (0.31692) (0.40641)
VN-Index & FBMKLCI Index (0.10506) (0.74806) (0.84008) (0.48909) (0.15213)
VN-Index & JCI Index (0.05392) 0.008453 (0.04440) (0.70600) (0.02286)
Source: Authors’ calculation
As regards to compared indices, there are close correlations between returns on
the VN-Index and those on stock market indices of neighboring countries, such as
Singapore, Thailand, Philippines, Malaysia and Indonesia, meaning that the hypothesis
H3 is accepted. To be precise, in sub-period 3 from March 2016 to April 2018 when
there is significant growth in the VN-Index, coefficients of ETC between returns on the
VN-Index and those on the SET, MXSG, PCOMPand FBMKLCI Indices are -
1.02629, -0.996704, -0.978917 and -0.840079, respectively, compared to -0.052448 of
the DJI Index and -0.477744 of the NKY Index. Similarly, when markets go down,
these coefficients of ETC also have high values (-0.850661 for return pairs between the
VN-Index and the MXSG Index or -0.706002 for return pair between the VN-Index
and the JCI Index). In addition, returns on the VN-Index are mostly affected by the
MXSG Index in Singapore in case of upward or downward trends in stock market
indices. Coefficients of ETC between returns on the VN-Index and returns on the
MXSG Index reach the highest value of -0.850661 when stock markets decrease and
always remain at a high level when there is a downward trend in stock market indices.
In case of fluctuations of stock market indices, the coefficient of ETC between returns
on the VN-Index and returns on the FBMKLCI Index reaches the highest level of -
0.748057. In other words, the role of Malaysia stock market is clearly evident when
stock markets rise and fall.
In terms of big stock markets, and also major trade partners, like those of the
United States, Japan and China, coefficients of ETC between returns on the VN-Index
and returns on the DJI Index in the periods of downtrends and sideways trends are
respectively -0.7814 in the period of downtrends (which are ranked at second place in
terms of value, after the highest coefficient of ETC between returns on the VN-Index
and the MXSG index of -0.850661) and -0.207181 in sideways periods. This is smaller
than coefficients between returns on the VN-Index and the FBMKLCI Index (-
0.748057) and the SHCOMP Index (-0.301787). In addition, the values of the
coefficient of ETC also show that returns on the VN-Index are mostly impacted by the
SHCOMP Index and the NKY Index in case of a significant increase in stock market
index (-0.99896 and -0.47744 respectively, compared to very small values in other
movement of indices). Moreover, the SHCOMP Index also has impact on the VN-
Index when the stock market slightly increases or fluctuates.
4. Discussion
First, this research supports theories about stock market interdependence by showing
interdependence between the VN-Index and other market indices, such as the DJI Index,
the NKY Index, the SHCOMP Index and stock market indices in ASEAN countries
through the Vector Error Correction Model. The Vietnamese stock market is
significantly affected by spillovers from neighboring countries’ stock markets including
Singapore, Malaysia, and bigger worldwide stock markets such as the United States,
Japan and China. The results of this research are consistent with similar studies on Latin
American countries (Christofi and Pericli, 1999; Choudhry, 1997), African countries
(Collins and Abrahamson, 2004; Sugimoto et al. 2014; Ahmed and Rui, 2018).
Second, the Vietnamese stock market is mostly linked with the compared countries
(including the United States, Japan, China, Singapore, Thailand, Philippines, Malaysia
and Indonesia) during the significant uptrends and downward trends in indices, which
is clearly presented through the highest level of coefficients of ETC and optimal lags.
During the fourth sub-period from May 2018 to March 2021, where there were
dramatic drops in stock markets, optimal lags between VN-Index Returns and
compared indices’ returns were from 3 to 8. This means that the VN-Index was
considerably impacted, for three days at least, by stock market indices of compared
countries in general and by bigger stock markets like the United States, Japan,
Singapore and Thailand in particular. Moreover, the empirical results show a strong
relationship between returns on the VN-Index and returns on compared countries’ stock
markets when stock markets dramatically increase (such as in the third sub-period) or
decrease (as in the fourth sub-period). In fact, stock markets tend to be more linked and
associated with each other during periods of shock rather than stable periods or periods
of post-shock. The Vietnamese stock market also follows this tendency. In particular,
the Vietnamese stock market is considered to be a market of individual investors (more
than 90%) who follow the psychology of the crowd or herd behavior (Dang, 2010).
Most domestic individuals do not deeply imbibe and understand market information or
consult news published by domestic and foreign experts. They accordingly participate
in the market with high risks and short-term vision. For instance, during the crisis,
information spreading through the media made Vietnamese investors believe that
prices would continue to fall further. At this time, behavioral finance theory and
feedback trading model show that many Vietnamese investors' psychology may have
been significantly affected.
Third, the Vietnamese stock market is mostly influenced by neighboring countries’
stock market indices like the MXSG Index in Singapore rather than Indices of the
United States, Japan and China. This finding is at first puzzling, since not only are these
three countries the largest economies in the world, but also they are the largest trade
partners of Vietnam, accounting for nearly half of the trade volume of Vietnam in 2019.
ASEAN nations are not important trade partners for Vietnam. The economic
integration effect is not dominant in explaining stock market co-movement in Vietnam.
Our hypothesis is that Vietnamese trade, especially export, is largely dominated by FDI
companies. In the first quarter of 2021, FDI firms accounted for 76% of total export.
FDI companies are also weakly linked to the domestic economy and domestic
companies have a hard time joining the global value chain led by FDI firms (Dao,
2021). We leave this question of trade-global value chain implication for financial
linkage for future research.
Last not but least, the correlations between Vietnamese stock market and Asean
markets are not necessarily due to economic integration effect between these countries,
but rather due to similarity in economic structures. Therefore, they tend to behave
similarly when a global shock hits. If tourism is an important sector in these economies,
then COVID-19 would have a negative effect on these economies. With the exception
of Singapore, most countries in the region depends on FDI-led exports in
manufacturing. The US – China trade war, which diverts trade and investment away
from China and into Asean countries, would have a positive effect on these economies.
As a result, stock markets of Asean countries are strongly correlated. What is driving
Asean stock markets correlation despite low regional economic integration is also a
worthwhile question to be investigated in the future.
5. Conclusion
By using the Vector Error Correction Model (VECM), the research demonstrates the
high coefficient of the cointegrating equation and high coefficient of ETC (𝜔) between
returns on the VN-Index and those of the three big stock exchanges, including the
United States, Japan and China, as well as five neighboring markets, including
Singapore, Thailand, Philippines, Indonesia and Malaysia, during five distinct periods
from November 2012 to March 2021. The research results indicate that the Vietnamese
stock market is closely correlated with the stock markets of neighboring countries
rather than the stock market indices of the United States, Japan and China. These
correlations become stricter when stock markets significantly rise or slump. In other
words, the study provides the first empirical quantitative evidence about the
interdependence between the VN-Index and international stock markets, making a
contribution to providing empirical evidence on the spillover effect among stock
markets in general and stock markets in emerging countries in particular. The study
results are also significant for both investors and policy makers. Investors as well as
policy makers can refer to these findings to choose an efficient investment strategy and
adjust operations in the Vietnam stock market, respectively. Finally, the study finds
weak explanatory power of economic integration effect in explaining stock market co-
movement in Vietnam, which could be due to the dominant role of FDI firms in
Vietnamese exports as well as their weak linkage to the domestic economy. We leave
this hypothesis for future research.
Acknowledgement
This research is funded by Vietnam National Foundation for Science and Techonology
Development (NAFOSTED) under grant number 5002.99-2020.02.
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Appendix
Appendix A. Summary of models and variables used in papers on stock market
interdependence
No. Authors Models Variables
1 Boako et al. + Continuous African stock market indices, commodity
(2020) Morlet Wavelet and prices, and commodity indices. All data is
its coherency model monthly and in US dollars (US$) from
1996–2017. The equity market data is taken
from Bloomberg; commodities prices are
obtained from the IMF.
2 Fernandez- + (MGARCH) Monthly data from 1982 to 2012 for the real
Diaz and Model; Consistent exchange rate, short-term interest rate (the
Morley Dynamic three-month Treasury bill secondary market
(2019) Conditional rate).
Correlation model.
3 Abdullahi + Bayesian VAR; Daily closing price of stock indices from
and Rui BEKK GARCH fifteen African stock exchanges and
(2018) Shanghai Stock Exchange (DataStream).
4 Xiao et al. Wavelet coherence Daily West Texas Intermediate (WTI) spot
(2017) analysis oil prices, 10 East Asian countries stock
markets indexes from 1992 to 2015
(DataStream).
5 Champagne + Structural models; Equity market return, equity market
et al. (2017) GARCH-DCC volatility, the risk-free rate. Daily option-
model adjusted spread (OAS) for 7 corporate
No. Authors Models Variables
bond indices from January 2001 through
January 2013:
Market variables are the daily return for the
S&P500 (US) or S&P-TSX (Canada)
index, the implied volatility for the VIX
(US) or the VIXC (Canada), the 3-month
US or Canadian T-bill rate.
6 Syed et al. Fluctuation analysis Daily closing prices of 11 US CDS and
(2017) (MF-DFA (MF- equity sectoral indices from December 17,
D8XA) 2007–December 31, 2014 (DataStream).
7 Ginanjar et Disccrete wavelet Daily data from 30 January 1970 to 31
al. (2016) transform; August 2011 for Japan (NIKKEI) and Hong
Continuous wavelet Kong (Hang Seng); from 29 May 1992 to 31
transform August 2011 for Australia (AS200) due to
its inception date of the index. (DataStream)
8 Zhang et al. Complex network Daily price returns of 27 indices from 2006
(2016) analysis to 2015 (Yahoo Finance API)
9 He et al. PCA; Multi-factor Daily closing price of 39 sector indices,
(2014) R-squared measure Shanghai Composite Index; Standard &
Poor’s 500 Index from January 3, 2000 to
May 31, 2011 (DataStream)
10 Liu (2013) Gravity model with Main stock market indices denominated in
dynamic panel US of 40 economies from the beginning of
specification 1995 to the end of 2010. (MSCI)
11 Samarakoon VAR model Daily index returns for 62 stock markets for
(2011) period from 2000 to 2009. All market
indices are obtained from Bloomberg,
except for Ecuador (from DataStream) and
Indonesia and Vietnam (from MSCI).
12 Chuang et VAR-BEKK model; Weekly closing prices of the Nikkei 225
al. (2007) VEC model Index, the Hang Seng Index, the Strait
Times Index of Singapore, the Seoul
Composite of South Korea, the TAIEX of
Taiwan and the SET Index of Thailand from
January 3, 1992 to June 10, 2006. The S&P
500 of the US and the FTSE 100 of the U.K.
are considered as the exogenous control
variables.
 No. Authors Models Variables
13 Egert and Cointegration tests Daily stock indices in Budapest (BUX),
Kocenda Prague (PX-50), Warsaw (WIG-20),
(2007) London (FTSE-10, UKX), Frankfurt
(DAX-30), Paris (CAC-40) from June
2003 to February 2005, (Bloomberg)
14 Sanvi and Constant Daily closing price of French CAC40,
Neto (2004) Conditional German DAX, US Dow Jones from 31
Correlations ARCH December 1993 to 30 July 2002
model
15 Bessler and VEC model, Daily closing prices of stock index of
Yang (2003) Directed acyclic Australia, Japan, Hong Kong, United
graphs (DAG). Kingdom, Germany, France, Switzerland,
United States, and Canada
16 Elyas et al. VAR Model Daily closing price of All Share Price Index
(1998) (Sri Lanka), CRSP index (US), Nikkei 500
(Japan), BSE National Price Index (India),
Hang Seng Price Index (Hong Kong), SE
Composite Price Index (South Korea), DS
Total Market Index (Taiwan), and Straits T.
Industrial Price Index (Singapore) from 1
January 1989 to 10 June 1994
Source: Authors’ compilation